Memories of Canadian Federalism

 

A blog post titled  “Memories of Canadian Federalism” evokes thoughts of a potential discourse about a President’s Choice product, perhaps a salad dressing or syrup, that promises a fusion of flavors that is both united and diverse.  Alas, that is not the case here.  I am in the process of putting the final touches on my fall Fiscal Federalism graduate course which interestingly enough seems to have a rather large number of students enrolled – for a graduate course.  The explanation for the bump in enrollment likely rests with a dearth of electives this fall for graduate and senior undergrad students in Economics at Lakehead rather than any innate magnetism on my part.

 

I have been teaching this course for a number of years now and it has evolved into a course that covers both the classic economic foundations of federalism with papers by James Buchanan, Charles Tiebout, Richard Musgrave, and Wallace Oates to more recent work that marks the new fiscal federalism with its focus on micro theory and incentives.  There are a lot of empirical papers – especially on measuring the Tiebout migration mechanism – and of course lectures on grants, transfers and equalization and those aspects that characterize what can only be termed as the “immeasurable majesty of the Canadian federal system in all its splendor.” Weekly module topics include, Federalism: Rationale and Functions, Federalism, Mobility and Resources: Tiebout Model-Theory, Federalism, Mobility and Resources: Tiebout Model-Empirical Evidence, Federalism, Spending and Public Sector Size, Centralization and Decentralization, Grants and Equalization, Public Goods and Taxation in a Federal System and the relatively new section Federalism, Health, Pandemics and the Environment.

 

Now, to the point.  In the process of going through my many folders and files, the following gem tumbled out:

 

 

 

I had not seen this for a long time, but it is a set of 20 little pamphlets in a convenient pocket sized paper carrying case called “Notes on Canadian Federalism.”  This obvious collector’s item dates back to the early 1980s or so in the wake of the national unity crises brought about by the election of the PQ in Quebec and the first sovereignty referendum as well as the natural resource clashes between Ottawa and Alberta over energy policy,  not to mention the conversion of federal grants for health and post-secondary education from a 50/50 cost sharing approach to the block Established Program Financing grant and the debate over repatriating the Constitution..  It was the best of times; it was the worst of times and in the tumult the Canadian Unity Information Office issued this 20-pamphlet set of information that in essence was a short lay person’s course on federalism but from the lens of the government of the day and its own agendas.  Why pamphlets?  Well, this is the 1980s.  There was no Twitter or Facebook.

 

 

 

As the images show, a wide variety of topics are covered by these 20 pamphlets which taken together provide a short course in Canadian federalism.  There are all kinds of interesting quotes in these pamphlets.  For example, in No. 1 What is Federalism it defines federalism as: “a type of association between groups, communities, peoples or nations who have agreed to unite in order to better safeguard their future and their prosperity…federalism ensures unity in diversity…Federalism…ensures a spirit of healthy rivalry among the member states. On the other hand, it calls for a sense of solidarity and for dialogue among participating governments.”  In No. 5, Advantages and Disadvantages of Federalism, among other things…”it should be noted that the economic policies implemented by one of the governments in the federation sometimes have negative effects on the total economic situation of the country. For example, heavy borrowing on the part of the provinces may greatly increase the deficit in the balance of payments and negatively influence national monetary policies.”  This is quite an intriguing statement given that it was eventually the borrowing of the federal government that led to the federal fiscal crisis and transfer payment cuts of the 1990s.

 

And in Note 12 The Provinces and their responsibilities there is this: “Certain responsibilities must belong to the provinces because each province has its own special characteristics that give it, its “personality”: language, culture, and different economic institutions.  Albertans may want to stress the physical sciences in university teaching and research programs, while the people of Ontario may want to concentrate more on business administration.”  Of course, in this day and age, if Alberta and Ontario were individual people, this would probably be seen as some type of gender-based career stereotyping.  But I digress.

 

These are intriguing documents and now a part of Canada’s fiscal economic history.  In essence, they provide a short course on federalism from the perspective of the federal government and issues of the day.  All things considered, they discuss concepts at a fairly high level for today’s general public and these types of discussions would not be out of place and perhaps even of benefit today.  After all, Canada is still a federation and if it seems acrimonious today it must be remembered that it has always been so.  The danger to a federation and its unity comes not from rancorous debate over issues, but from silence when the constituent units have decided to stop talking.

Canada's Life Expectancy at Birth in Decline

 

Standards of living are marked by a number of indicators most upfront of which are economic measures such as per capita GDP or per capita wealth.  However, other indicators of the standard and quality of life include basic health indicator and life expectancy at birth has long been a marker of the average “quantity of life” a country provides.   Yet after the increases of the twentieth century and 21^st centuries which saw average life expectancy in the world rise from 32 years in 1900 to 71 in 2021, much of the world has seen a decline in recent years in the wake of the COVID-19 pandemic.   Statistics Canada has already noted that for three years in a row, life expectancy at birth for Canadians has declined from 2019 to 2022 with this decline being driven by an increase in unexpected deaths (such as substance related deaths, suicides and homicides) as well as the impact of COVID.

 

However, what is more interesting in the Canadian case is just as real per capita GDP growth slowed after 2010, so did the growth in life expectancy at birth which highlights the connection between economic growth and performance and ultimately health indicators such as life expectancy.  The accompanying figure plots life expectancy at birth for Canada and Ontario at assorted overlapping three-year intervals since 2005 and they show that life expectancy at birth grew from 2005/07 to 2011/13 from 80.51 years to 81.73 years for Canada and 80.86 years to 82.19 years for Ontario.  Growth then slowed and life expectancy at birth peaked at 81.94 years from 2015 to 2018 for Canada and 82.41 years for Ontario.  Since then, both have declined hitting 81.55 years for Canada and 81.97 for Ontario by 2020-22.

 

 

 

While much of the decline definitely coincides with the pandemic, life expectancy was essentially flat from approximately 2011/13 to 2017/19 when the decline begins but then accelerates during the 2019/2021 window as the pandemic strikes.  So, the takeaways I get from this is that the pandemic indeed is associated with a decline in life expectancy at birth, but growth had already plateaued and begun to slip well before this in the wake of the 2008/09 recession and the slower economic growth and performance since.  The pandemic appears to have strained or augmented whatever forces were already in play prior to 2020. 

 

Of course, one might ask if this has also occurred in other countries.  For example, a quick glance shows life expectancy at birth in Japan rising from 2012 until 2020 before a decline set in going from 83.1 years to peak at 84.56 in 2020 before declining to 84 by 2022.  From 2012 to the pandemic start in 2020, life expectancy at birth grew 1.8 percent in Japan but only 0.2 percent in Canada.  Germany, on the other hand from 2012 to 2020 grew by 0.6 percent (from 80.54 to 81.04) years.  The United States on the other hand saw life expectancy essentially flat since 2012 (growing just under 0.1 percent) to the pandemic with a decline during the pandemic.  These trends are food for thought indeed. 

Can Ontario's Universities Be Made Sustainable? Part 2 - Solutions?

Last post, we surveyed the financial situation of Ontario universities and the evidence suggests that the “system” as a whole is sustainable given that total revenues generally exceeded total expenditures.  However, that did not mean that there was not a sustainability issue given that as many as a dozen institutions were expected to run deficits going into the 2024-25 academic year.   It would appear that some institutions are more sustainable than others and that smaller and more remote institutions in particular faced financial issues of which the Laurentian situation was the grimmest recent example.  However, even larger and more research-intensive universities are not immune from financial issues as illustrated by the recent example of Queen’s University.

 

What are the solutions? The measures needed are either to reduce expenses, raise revenues or some combination thereof.  With respect to revenue, you will have to assume the total provincial grant package is not going to change beyond what the government has promised.  On the revenue side, there is enrollment revenue, and you can either raise price or quantity sold when it comes to students.  Demographics suggest that domestic enrollment is finally starting to rise but international enrollment is not in the wake of federal measures and given domestic tuition is still frozen it means tuition revenues cannot be expected to be a big driver of sustainability.  Moreover, much of the potential domestic enrollment increase over the next decade or so is going to be in the GTA which is of limited value to more remote regional universities.

 

 

Other revenue solutions?  Fundraising?  Ancillary revenues? Sales of goods and services?  Research services?  These already are being used and their growth potential depends on the local market.  In the case of ancillary revenues like parking, food services or even residence fees, these took a large hit during the pandemic and have yet to recover.  Students and even faculty and staff are no longer as likely or willing to be a captive market on campus.  While there is still a desire for in-person course learning, many university students like the flexibility of online or hybrid options and these options naturally do not come with parking sticker revenues or food purchases in campus eateries. Fund raising to build endowments?  These take a long time, and the reality is that donors like to contribute to goals with a tangible outcome – a building, a program, a scholarship – and not to a fund that will generate revenues for general operating expenses.  Indeed, some donations by creating new programs or positions or a building will contribute to operating expenses in the long term even if they generate short term resources.

 

Which brings us to the cost side.  One simple solution is simply a draconian government mandated across the board pay cuts to all university employees (there probably is a way to do if they put their mind to it).  In 2022, salaries and benefits for Ontario universities were $10.5 billion out of total expenses of $17.2 billion – 61 percent.  Academic salaries were only $4.8 billion or 28 percent of total expenses.  If only 28 percent of total university expenses are academic salaries (46 percent of total salaries and benefits) – it does beg the question as to what all the other money is going to.  Nevertheless, in theory, hundreds of millions of dollars can be saved by cutting salaries and benefits 5 or 10 percent – in the short term.  However, a system wide cut is a blunt instrument and as noted some institutions are just fine without it.  Moreover, an across the board cut - aside from the obvious political turmoil it would cause – does not address the structural issues of universities perhaps having the wrong mix of programs for their markets or even too many programs given their regional demand.  A wage cut without addressing the structure of spending only postpones the sustainability problem to another day.  And a wage cut to universities alone raises the more uncomfortable question about the wages and salaries for the rest of the broader public sector.  If you think universities pay well, then take a look at municipalities and the health and education sectors.

 

Another cost side solution is a university-by-university approach tailoring government initiatives and responses to the unique issues of each institution.  Maybe some institutions should be closed outright but every community with a university would fight (one hopes) to retain their university.   Are there cost savings in universities working together to save on procurement of supplies or services?  Can automation and AI streamline and reduce costs when it comes to management of students, human resource functions, recruitment, enrolment management?  And of course, can one save money by more intensive use of current human resources?  On the staff and faculty side we can term this as more “efficiency” or doing more with the same resources.  On the faculty side, this inevitably means larger classes or more classes – an increase in class size and teaching loads.  Of course, this may reduce program offerings and that leads to less diversity in both courses and programs.  On the other hand, does every university need the same set of programs and departments? 

 

All of these revenue and cost measures just outlined are not new ideas.  They have been around for some time and ultimately involve nudging the trajectory of expenses and revenues to ensure a more sustainable path.  They do not solve the fundamental problem outlined which is that Ontario has a set of universities which its government and public really do not want to pay more for.  Ontario funds its universities and regards it as a system but in reality, it is a set of semi-autonomous but highly regulated institutions, each with its own funding situation – some of which are sustainable and some which are not based on their debt and deficit positions - and filled with processes that lead to slow decision making given the independence of staff and faculty in particular. Nudging them does not seem to work very quickly if at all.

 

Another solution?  A complete overhaul of Ontario’s university system (I am not going to deal with community colleges but to some extent the same solutions can apply to them) that involves merging a number of the smaller institutions (along with more financially troubled larger ones if necessary) into an actual regional university system with individual campuses offering less diversified and more specialized offerings. This may be a way out given the politics of every major urban area in Ontario wanting a university but unrealistically expecting a full range of courses and programs that cannot be sustained given regional enrollment bases.

 

What might such a reform look like for any government willing to bite the bullet and incur the wrath of assorted regional electorates?  Well, the more sustainable larger research-intensive universities would likely remain pretty much as they currently are.  We all know who they are but at minimum would include University of Toronto, Western, Waterloo, McMaster, perhaps Queen’s and perhaps either Ottawa U or Carleton or maybe both.    Some might add Guelph to this list or even York.  As for the remaining universities – some of which are rather large – one could create three university systems: The University of Southern Ontario (Windsor, perhaps Guelph, Laurier, York, Universite de’Ontario francais, Brock), The University of Eastern Ontario (TMU, Trent, Ontario Tech, OCAD) and A University of Northern Ontario (Algoma, Lakehead, Laurentian, Nipissing, NOSM, Hearst). 

 

Of course, simply merging these various institutions into one a system only makes sense if it is accompanied by program and administrative rationalization.  For example, a University of Northern Ontario would not need six economics or six biology or six engineering departments or as many department chairs or eventually as many faculty and staff for that matter. There would also be a marked decline in the demand for Deans, Vice-Presidents, Associate Vice-Presdients and Presidents and assorted entourages.   The same would go for a University of Southern Ontario or Eastern Ontario.   Students would need to go to the campus where their specific program is being offered for their in-person courses or take them online.  This would be a major restructuring of courses and offerings as well as how they are offered.  Indeed, this rationalization via specialization of both administrations, faculty and staff in specific campuses linked by modern information and digital technology is where some savings might be.  Simply merging universities, keeping all the programs intact and creating a new administrative apparatus with dominion over them all is not going to save any money.  It will simply spend more.  The goal is to reduce the expenditure side well below the current revenue side to provide more resources overall for the system.  This outcome also requires government not take the savings and spend them on something else. 

 

Is a merged campuses solution just a pig’s breakfast of acrimony and political chaos?  Yes indeed.  Could it work? Perhaps with the right set of skilled decision makers but let’s face it, this is 21^st century Canada – skilled decision makers seem to be in short supply and outnumbered by word salad spewing political performers masquerading as the former.  And then, why have three systems?  Maybe those three systems that have been proposed could simply be combined into one – The University of Ontario alongside the remaining half dozen or so stand-alone universities.   Each University of Ontario campus would remain on the footprint of the current university but with fewer programs and faculties and of course fewer administrators and staff.  In some communities, you might even merge them with the local community college.  Sure, there would be a lot of unhappy campers, but it would be the system that Ontarians are willing to pay for.   If they don’t like it or if there are not enough places for everyone, they would be welcome to send their kids elsewhere – perhaps to another province or maybe an American liberal arts college? 

 

Trying to change the Ontario university system to deal with long-term sustainability is a task that most governments are not up for.   Most likely, the tendency will be to do nothing and let the system meander into yet another crisis down the road.  This is the most likely path forward given that not only do Ontarians not want to pay more for universities, but they do also not wish to think about them unless their children have trouble getting into a desired program or a residence spot.  In the absence of more public support for universities, another solution is to simply deregulate university tuition and let universities set their own fee schedules to attract and retain students based on what they see as their market and strengths.  It remains that the tuition currently being paid by domestic students is less than half what it actually costs to educate them.  The price is too low because it is subsidized by government.  More tuition competition in the end would result in universities eventually making their own cost-side restructuring decisions given that what they offer would need to be more tailored to price. Such an approach would also need to be accompanied by an enhanced provincial student aid program to deal with lower income accessibility to university (and college) education. 

 

 

 

 

However, again, none of this is new.  All of these ideas have been around for a long time but always come up against the political culture of the province and the culture of universities.  When it comes to universities, Ontarians want guaranteed access to a premium university system that provides a wide range of courses and programs but at discount prices.  The government likes to create universities but does not like to fund them.  Good luck with that.

Can Ontario's Universities Be Made Sustainable? Part 1-The Issues

 

Ontario’s post-secondary system is facing the problem of financial sustainability.   Indeed, the inevitable question arises of whether Ontario simply has too many colleges and universities.  An excellent overview of this question with an accompanying discussion is available here.  And of course, there is always Alex Usher’s excellent blog on all aspects of Canadian universities with posts over the years on provincial and Ontario university finances.  However, the question I wish to address in light of the evolution of Ontario university finances is whether the system can actually be made sustainable with sustainability defined as having the resources available to fund desired expenditures. 

 

Resources are of course the revenues available to universities and they need to be compared to expenses.  Figure 1 plots the total revenues and expenditures of the Ontario university system as a whole from 2001 and 2022 and based on this very simple metric, the system as a whole is “sustainable.”  In 2022, the system took in $17.5 billion in total revenues whereas total expenditures were $17.2.  However, this is overly simplistic because Ontario universities do not function as a system per se but as 24 institutions (20 publicly supported universities and four associated universities).  Some of these institutions-usually large research intensive ones in southern Ontario -  have been running substantial surpluses but a rather large number have been running deficits and acquiring debt with the most extreme example  of what can happen there being the Laurentian insolvency.

 

 

 

The challenges facing a number of smaller institutions in particular and especially in Ontario’s north is that their revenues are having difficulty keeping up with expenditures.  Part of the issue is that provincial government grants have essentially not been growing over time and provincial funding as a share of total university revenues has declined as illustrated in Figure 2.  This leaves student tuition and fees and a plethora of other sources ranging from miscellaneous federal funds, ancillary fees, to investment income as the sources of sustainability.  Tuition fees have grown since 2001 from 24 percent of total university revenues to 45 percent in 2022.  The provincial share of university revenues has declined over the same period from 36 to 24 percent while all other remaining sources have also declined from 39 to 31 percent.  Notes again, that performance across individual universities may differ substantially.  Northern Ontario universities face particular challenges in growing domestic enrollment given that population is clustered in the GTA.

 

 

 

After a period of long-term provincial government behaviour which has essentially constricted their provincial grant funding and shifted reliance to tuition and other sources, the crux of the current set of issues is as follows.  Since 2018, domestic tuition in Ontario was cut by ten percent and then frozen.  Grant revenue has also been essentially frozen.  Universities in the GTA with access to a lot of students have boosted their domestic enrollment to generate revenues.  Universities without easy access to the GTA and its demographic advantages have recruited more international students, but all Ontario universities (and colleges in particular) have gone this route.  However, that door is now being shut at least in the short term by the federal government over concerns about immigration affecting housing stocks.

 

In the short term, the provincial government also finally responded in spring budget 2024 to its Blue-Ribbon Panel Report which called for tuition increases and increased provincial funding of $2.5 billion dollars  by providing a short term funding reprieve to universities that entailed about $1.3 billion over three years.  This is really half of what was recommended by the government’s own panel and was accompanied by an extension of the tuition freeze.  The Council of Ontario Universities noted this assistance while welcome  has fallen far short of what was needed and that eight universities are still forecasting operating deficits for 2023-24 and 12 are projecting deficits for 2024-25. 

 

So, where do we go from here?  Well, the problem really is this: Ontario does not want to pay for the university and college system it currently has.  It certainly wants local universities with a broad range of programs to educate their children, but it does not want to pay for them. Ontario has too many universities (and colleges for that matter) given what seems to be the expressed willingness to pay by governments and the public.  The Ontario public does not want to pay more for universities in terms of out-of-pocket tuition nor does it want to pay more in terms of increased government funding especially if it requires raising taxes.  This has been a feature of Ontario’s political culture for quite a few decades now, no matter the political stripe of the government.  This means that expenditures of the current system need to be tailored to what Ontarians as demonstrated by the actions of their government seem to wish to pay. More on that in a post to come.

Ontario's Dynamic Economy in Doubt

 This post originally appeared in the Fraser Institute Blog.

 

Ontario’s future as dynamic economy in doubt—if employment trends continue

— June 22, 2024

As Canada’s largest province both economically and in terms of population, Ontario is a key driver of Canadian prosperity. Its economic strength manifests itself via job creation and Ontario has nearly 40 per cent of the country’s employment. Since 2010, Ontario’s total employment has grown by more than 21 per cent while the rest of Canada (ROC) has expanded by about 18 per cent. While Ontario’s employment growth mirrors that of the rest of the country, it does exhibit some interesting differences in terms of public, private and self-employment shares of total employment and their performance over time.

 

The first chart below plots public-sector employment as a share of total employment for Ontario and the rest of Canada for the period 2010 to 2023. Overall, Ontario is somewhat less reliant on public sector employment but there is a difference in trends over time. From 2010 to 2019, Ontario was marked by a slight decline in the public-sector share of employment as it went from 19 to 18 per cent. At the same time, the rest of the country stayed at about 20 per cent. Since 2019, both Ontario and the ROC have seen a jump in public-sector employment to nearly 20 per cent for Ontario and 22 per cent for the ROC with a levelling off after 2022.

 

 

The second chart shows Ontario consistently above the ROC when it comes to private sector employment shares reflecting Ontario’s continuing role as a centre for Canadian manufacturing and finance especially in the Greater Toronto Hamilton Area (GTHA). Moreover, since 2010 that share has grown from under 66 per cent to 67 per cent with that growth continuing after the post pandemic employment rebound. The rest of the country has been somewhat more moribund in this regard as its private sector employment share is no higher than in 2014.

 

 

 

The third chart is more concerning given the trends revealed for Ontario and the rest of Canada. First, Ontario’s self-employment share was relatively stable between 2010 and 2020 at an average just above 15 per cent. Over the same period, the ROC saw a decline that by 2020 brought the share to below 15 per cent. Indeed, over the 2010 to 2020 period, the ROC went from slightly above Ontario to below when it came to the self-employment share. When the pandemic hit, the self-employment share in both Ontario and the ROC took a steep dive from which neither has yet to recover. This represents a remarkable free-fall that does not bode well for the future.

 

 

 

What are the implications of these trends?

 

While the long-term increase in total private sector employment is reassuring, the rise in public sector employment and drop in self-employment is not. To start, a drop in self-employment means a drop in the number of small businesses and ultimately a decline in entrepreneurship. The shock and restrictions of the pandemic were invariably a factor as many smaller and family or individually run businesses decided to pack up shop for good. While some of these individuals may have gravitated towards public-sector employment it is more likely given the aging labour force that they simply have decided to retire from the labour force permanently.

 

This is a national trend but in a province that is the economic engine of the country , it foreshadows a decline in innovation and future economic growth. Small businesses are the backbone for developing entrepreneurship and innovation and they also provide opportunities for financial independence aside from traditional employers in both the private and public sector. Moreover, while the self-employed themselves may only account for 14 per cent of employment, they in turn are responsible for a large chunk of the remaining private-sector employment.

 

In terms of other takeaways, another interesting item to note is that for Ontario, the period of declining public-sector employment shares occurred under the McGuinty-Wynne governments while the increase since 2019 has been under the Ford government. While the pandemic is inevitably a factor in the post-2019 public-employment surge, as it recedes into the past there seems to be no movement towards the public-sector share shrinking. Indeed, if one looks at the public-sector salary disclosure lists, during the McGuinty-Wynne era spanning 2003 to 2018 the list added 130,981 salaries over $100,000 to the broader public sector. Since 2018—a much shorter time period—nearly 150,000 salaries have been added to the list.

 

More public-sector employment is not better for long-term economic growth. Ontario’s future as an innovative and dynamic economy may be in peril if these trends continue.

Author:

Livio Di Matteo